The Wirecard Fiasco
From being one of the biggest fintech names in Germany to being alleged for unaccounted funds, Wirecard has been all over the news recently. Ernst and Young, Wirecard’s auditors noted almost $ 2 billion in missing funds. Over the previous 3 trading sessions, the stock of Wirecard has fallen over by 85% erasing almost $10 Billion off of Wirecard’s market value. However, this situation did not arise overnight, the talks of a scandal have been going from as long as May 2018, when questionable accounting practices around Wirecard were revealed. The source of the fraud and what exactly these unaccounted statements still remain, a matter of speculation. The company has withdrawn its most recent financial results and has commented on how previous results of financial statements may also be inaccurate. [1] The German Financial Regulator, BaFin, has condemned the act and proclaimed it to be a complete disaster which has also led to the arrest of Markus Braun, the ex-chief of Wirecard.
Background
Wirecard has been one of the biggest fintech players in Germany. On June 22, 2020, Wirecard confirmed that EUR 1.9 billion of cash pile that was reported, may not exist. Ernst and Young also reported that almost 4/5th of the net cash reported in the last audited accounts could not be verified. Even KPMG published a special audit report in April 2020, stating that Wirecard’s revenue and profits could not be verified. [2] However, before anything can be adjudged, it is important to understand where it all started.
Wirecard has been operating for over two decades and provides the technology to businesses to accept payments from customers. It is a global brand and a part of the Visa and Mastercard networks. The first instance of investigation occurred when alerted from whistleblowers, Wirecard’s internal team started looking into suspicious transactions in Asia. Whistleblowers had accused Wirecard’s chief of Finance in Singapore for falsifying transactions in the books of accounts to boost sales and show more growth in the Asia-Pacific region. In April 2018, after an investigation by Wirecard’s lawyers, irregularities in accounts and falsified documents were procured. In February 2019, the Singapore police officials raided the offices of Wirecard, post which there were 6 Singapore employees identified for fraudulent accounting involving around 11 external transaction partners. Financial Times, in the coming months, reported that the CFO of Wirecard has authorized 4 money transfers from Germany to Singapore. These transfers were made to inflate profits and growth. After the whistleblower alleged the scam, there was a search for missing cash which led to Philippine payment processors. It was alleged that the missing funds were held in an escrow account with two Philippines banks. After an investigation into the BDO Unibank Inc. and Bank of the Philippine Islands, it was proclaimed that these banks never had any dealings with Wirecard and did not hold the missing EUR 1.9 billion and the banks denied hosting the accounts of the German fintech player.
Response towards allegations
Wirecard baselessly denied all allegations and called them defamatory in the beginning. The company also said that the allegations were a mere feud between employees. However, in March 2020, Wirecard published the report of findings made by its Singapore based lawyers. In the report, it was ascertained that many transactions could not be correlated and there was a trail of contracts that were created for auditing purposes. Post this, the annual results of the company was delayed in view of oversight and internal controls.
However, we find it interesting to note that while the events such as above were going on, investors still remained enthusiastic. In fact, there were certain incidents during May where investment advisors recommended to buy stocks of Wirecard. Even SoftBank announced that it shall be backing Wirecard by lending EUR 900 million with a 5-year bond period. BaFin, however, in February 2020, announced a ban on nets against the stocks of Wirecard, in order to prevent any harm to the economy as there were major swings in the stocks of Wirecard.
What now?
The question amongst reporters and investors remains as to if Wirecard should be saved. The alleged practices of Wirecard have led to a decline in investor sentiment and it will remain to see if Wirecard can rise from such a scandal. Wirecard is currently exploring restructuring measures to keep the company afloat. The name of the company in itself has become the mark of famous regulatory and corporate failures. Customer relationship is the most valuable asset in fintech firms, and the more customers it adds, the more value it gains. After the scam, what value would Wirecard have, whether fiscal or reputational, we shall yet see.
The question we ask is – could have blockchain prevented the entire fiasco?
[1] Wirecard fights for survival as it admits the scale of fraud, Financial Times.
[2] Can Wirecard be saved? And should it be? The Washington Post. Reported on June 23rd, 2020 at 12:22 PM by Chris Bryant | Bloomberg.
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